macrocephalopod

Every derivative introduces a new parameter required to price it in a model, and the derivative becomes a way to trade that parameter. In the case of options the parameter is implied volatility. For futures/forwards the parameter is the basis (~dividends minus financing)

Prob silly Q, but why cant you use cash to buy SPY? Why would you need financing from broker? Very insightful. Broker spread drives cost of carry. Anything that offsets the benefit of futures? Since they have certain risk SPY itself lacks right?

Imagine a scenario where you are a Mm and you have $100 million and your portfolio margining is only $100 million but your long SpY position was $1billion and your short futures position (or combo) was short notional $1 Billion, you still need ‘Cash’ to fund the spy

I see, so basically it's better to avoid using cash when possible, since it may be needed as collateral / margin for other positions (like futures, which can be a more efficient way to express a trade), assuming Im following

Collateral is different than financing.

Ah true, Im a little tripped up here. So I think scenario is: You have 100mil in cash, &100mil in borrowed $ (margin) You are long 1bil of SPY, which costs 1bil You are short 1bil notional of SPYfut, which costs the futures margin From here Im a bit lost.

It sounds like total funds to use are 200mil. The cost of the futures position is Z. So we only have (200mil - Z) left to cover the stock position, but thats not enough cuz it costs 1bil. Is that why we need broker financing?

Essentially yeah. Stocks (including ETFs) are cash instruments, when you buy them *someone* needs to hand over cash in exchange. If you do it on margin, that just means your broker is handing over the cash and charging you for it (effectively they are lending you the cash).